"We are seeing some indications that consumers are increasingly looking for value, which among other things, has resulted in certain wholesale customers remaining cautious ahead of uncertain consumer spending during the holidays," Williams said.
CFO Yves LePendeven provided more color during the conference call, describing sales trends both in its direct-to-consumer and retail channels.
At retail, Funko was seeing softer sales, especially in the U.S. "Globally in Q3, the POS sales that we saw were down single-digit year-over-year," LePendeven said. "However, in the U.S., we saw that that was down low-double-digits versus EMEA, which is going pretty strong and we saw double-digit growth."
Weak POS has slowed sell-in, although LePendeven believes that consumers’ taste for value is leading them to wait for sales before making their holiday buys. "How that translates to the wholesale channel is that while POS was down in Q3, a more significant portion of consumers will be shopping during that Black Friday, Cyber Monday period. And I think that's the kind of cautiousness that we're seeing from buyers that kind of got this wait-and-see approach to see how that period of the holiday goes."
Those same trends were visible in Funko’s direct-to-consumer business. "In Q3 we saw signs that our direct-to-consumer customers were more responsive to promotional activities,” LePendeven said. "We believe shoppers are increasingly looking for value, which we anticipate will shift a higher percentage of our sales into Q4 when we ramp up our promotional activities and marketing spend ahead of the holidays."
Funko saw the biggest sales weakness in its mid-price products. "Really what we saw is not so much on that kind of Mondo high end," LePendeven said in response to a question about whether the most expensive products were where the greatest weakness was. "We still see excellent sell-through. Every time they drop a product it sells out very quickly. So no concerns there. I think the bulk of our sales happens kind of in that average price point range. And that's where we saw consumers were just more responsive…" [to promotional pricing].
Funko sales were down around 6.4% vs Q3 2023, lower than expected. Profits were above expectations, at $4.6 million for the quarter vs. a $16.2 million loss in the year ago quarter. The sales outlook for Q4 was reduced, although the top end of the new guidance was within the bottom range of the old guidance. Guidance for Q4 profitability was raised.
Williams addressed concerns about tariffs on imports that the incoming U.S. administration has vowed to impose in response to a question in the conference call. She stressed that efforts in recent years to diversify sourcing had brought the percentage of its products sourced from China down to around one-third, and that efforts to move manufacturing away from China are continuing.
She raised concerns that the short-term impacts might include shipping bottlenecks as importers try to get products into the country before the imports are imposed. "The thing I am worried about in the shorter-term, let's call it Q4 and Q1: If those tariffs are enacted early in the administration and people have a strong signal of that, I think we will see a rush for people to ship, especially higher-priced items, into the United States early like ahead of when they would actually normally need it," she said.
"Now while we have 70% of our freight rates under contract and so that's not a risk for us, what is a risk is the capacity. And so if we see a real push to get more products into the United States ahead of tariffs, if they are enacted, we might have some challenges that we'll need to overcome with that and the team is working on plans for that now."